How Pepsi fell behind in the cola wars—and then lost KFC

Pepsi has suffered many setbacks in recent years, but perhaps few were as symbolic as being jilted by a long-time partner it used to own, KFC.

The fried chicken chain said last week that it would begin replacing PepsiCo's namesake soft drinks with Coca-Cola products at its 3,700 U.S. restaurants in January. The two companies' partnership stretches back 40 years, since the time PepsiCo bought the fast food chain. (PepsiCo spun KFC off in 1997.) KFC represents a tiny sliver of Pepsi sales, but the defection reflects the ongoing deterioration of the drink's brand power .

For decades, the Coke vs. Pepsi cola wars were a part of mainstream culture, with memorable ads showcasing blind "Pepsi Challenge" taste tests of the two drinks. Pepsi's TV commercials with pop star Michael Jackson and model Cindy Crawford in the 1980s and '90s became part of the larger zeitgeist. Back then, Coke's U.S. market share was just a percentage point or two more than Pepsi's.

It's a very different story now. Last year, Pepsi-Cola had 8.1% of the U.S. carbonated soft drinks market by volume last year, far behind Coke's 18.5%, according to trade publication Beverage Digest. In 2024, Pepsi fell to third place behind Dr. Pepper for the first time and remains there. What's more, sales of Diet Coke and Coke Zero are multiple times higher than their Pepsi counterparts.

Pepsi didn't so much collapse as get outmaneuvered. Coke has reshaped its business around brand building and innovation, shedding its capital-intensive bottling business and successfully betting on faster-growing categories like dairy-centric and protein-based drinks. PepsiCo has remained a sprawling portfolio company where soda was one priority among many, and one that got less attention than it used to. The result is a PepsiCo that generates more than twice as much revenue as Coca-Cola but whose market valuation is only about half as big.

Wall Street analysts say that for years PepsiCo CEOs have turned their attention away from the company's soda business in North America because of what was long seen as soda's secular decline. And it's true that soda sales slumped for 16 straight years. But starting in 2021, the U.S. soft drinks industry stabilized, with Americans gravitating toward healthier and more functional beverages, like those featuring protein and energy additives. PepsiCo CEO Ramon Laguarta has admitted that the still-massive business deserves more attention.

"We do not feel good about the beverage business," Laguarta told Wall Street analysts earlier this month. "So we are putting all the urgency of the business and focus on improving our performance in soft drinks."